Asset Allocation update and review - March 2019

Active asset allocation drives the majority of our returns. Therefore, it has been frustrating to an asset allocator to have sat on one’s hands for the past couple of years. Although I do remind colleagues that doing nothing is doing something, it does not make for great headlines. The last two and half years are the quietest I have witnessed in the last two decades with regards to allocation activity. This is a function of where we are in the economic cycle. We have written on this in the past, but as a reminder it is our belief that we are towards the end of the economic cycle. However, the end does appear to be taking some time to finally be reached and, at this stage, no market commentator could predict which day, month or even year this might occur with any degree of accuracy. Calling the top and bottom of a market cycle correctly is achieved more through luck than judgement, but the trend should be apparent. The big news is that we have recently made what is a substantial move with asset allocation by downgrading our outlook for European equities through a reduction in exposure in favour of global equities. Our overall equity weight remains the same, the regional bias has been changed.

To be blunt, the investment case for Europe is weakening; Germany is flirting with recession, the “gilets jaunes” movement in France appears to be gaining momentum and Italy faces the latest political challenge. Year to date, the European market has been one of the strongest. This recent strength is proving to be an attractive point to reduce exposure to an appropriate level given the associated risk in continuing to maintain these holdings. Europe traditionally trades at a discount to the US, which can provide opportunities, but growth potential is beginning to worry us. European equities are being removed from lower risk mandates, with a reduction to a modest weight in other mandates. The switch to increase global equity exposure at the expense of Europe maintains the overall equity weight. It is worth noting that the global exposure will have some European exposure, where the underlying manager can identify a good idea relating to a particular European company, sector or country.

My second piece of news is more of an observation. 2018 was a disappointing year in terms of total return and, whilst we do not manage absolute return mandates, to lose real returns over the year is upsetting. Our multi-asset approach infers that in a strong equity market the majority of our mandates will not keep up, although their own targets will likely have been met. The converse should be true, with the final quarter of 2018 providing the evidence for this. In a quarter that witnessed a savage equity sell off our mandates were not immune, but they were in no way exposed to the same extent. What gives me greater comfort is that our mandates are not defensively positioned as they could be; we are not that bearish, yet.

We will, of course, continue to keep you updated on developments over the coming months as these uncertain times continue.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. Investment markets and conditions can change rapidly, and as such the views and interpretations expressed should not be taken as statements of fact, nor should they be relied upon when making investment decisions. We undertake no obligation to update or revise any forward-looking statements and actual results could differ materially from those anticipated by any forward-looking statements.

Past performance is not a guide for future performance. The value of your investment can fall, and you may not get back the amount invested


James Calder – Research Director